Taking free of security interests under the PPS Act

The Personal Property Securities Act 2009 (Cth) (PPS Act) sets out the circumstances in which a person purchasing property governed by the PPS Act is able to take the property free of security interests: Pt 2.5 of the PPS Act.

These rules are designed to protect purchasers and facilitate sales of personal property. They are often referred to as the “taking free” provisions or the “taking free” rules. They effectively extinguish the security interest at the time of the transaction, for eg, in the case of a buyer, the buyer has good title to (takes free of) person property with an unperfected security interest without any encumbrances. For this reason, this is also referred to as the “extinguishment provisions” or the “extinguishment rules”.

This guidance note explores some of the key “taking free” rules, including the general rule regarding unperfected security interests (s 43 of the PPS Act) and taking business assets free of security interests (s 46 of the PPS Act, the “in the ordinary course of business” rule).

This guidance note also provide practice tips on selected common scenarios which legal practitioners will find useful.

See Taking free of security interests under the PPS Act.

Priorities in general under the PPS Act

The PPS Act provides for a priority regime applicable to a competition between two or more security interests. Division 3 of Pt 2.6 of the PPS Act outlines the rules governing the priority of security interests.

This guidance note is designed to be a good starting point for legal practitioners who need to advise generally on priority where there is a competition between security interests by covering the likely, common scenarios. The key concepts that are explored include the “default” priority rules, perfection of security interests.

See Priorities in general under the PPS Act.

PMSI priority under the PPS Act

Subject to limited exceptions, purchase money security interests (PMSI, pronounced “pim-sey”) are a special type of security interest that has “super priority” over other security interests if it is registered on the PPSR within the timeframes prescribed by the PPS Act.

This guidance note is designed to provide a good starting point for legal practitioners who need to advise generally on PMSI priority by, first, providing guidance regarding PMSI perfection, then, by covering the likely, common scenarios where a priority contest involves a PMSI. It also provides practical guidance to legal practitioners who encounter the not-uncommon situation where the secured party may have missed the critical timeframes for PMSI registration.

See PMSI priority under the PPS Act.

Priority/subordination agreements

If a secured lender is prepared to allow repayment by the borrower to another secured lender (over the same asset), while the borrower is solvent, but is concerned that particular priority arrangements will operate if either of the lenders enforces its security, the lenders may agree to enter into a deed of priority.

Typical arrangements under a deed of priority include:

• • the holder of the first security may agree that a second security will have first priority to either a specified amount (of principal plus interest and costs) or (less commonly) for all the monies secured by the second security; and
• • the holder of the first security may agree that its first priority will be limited to a specified amount plus interest and costs.

This guidance note looks at priority arrangements, including “subordination agreements” under the PPS Act. It introduces to legal practitioners the industry model documents that may be utilised in a transaction, and considers the issues that a legal practitioner may encounter when drafting, reviewing or negotiating of a deed of priority with subordination provisions.

See Priority/subordination agreements.